“Cash in Lieu” of Benefits

August 1, 2016: This article is being updated for IRS Proposed Regulations (July 8, 2016). It was previously updated (Feb. 22, 2016) for IRS Notice 2015-87, which addresses the treatment of employer opt-out payments for purposes of the Employer Shared Responsibility “Affordability” test, and for other guidance. The updated article will be available soon.

A growing number of employers are offering a “cash in lieu” or “pay in lieu” of benefits option, under which the employer offers an employee a taxable “opt out” amount, if the employee declines coverage under the employer’s group health plan because the employee has coverage under a spouse’s group health plan. Some employers require employees to certify that they have other coverage in order to opt out of the group health plan, while others allow employees to opt out even if they do not certify they have other coverage.

Although it is legal to offer a cash incentive to employees who opt out of the employer’s group health plan, keep in mind that this option will always be taxable. Additionally, there are numerous other important considerations:

The option should be offered through a cafeteria plan so employees who elect group health plan coverage (not taxable cash) will not have taxable income.

In 2017, the “cash in lieu” amount will have to be counted in the “affordability” determination under the Affordable Care Act (ACA), unless it qualifies as an “eligible opt out arrangement.”

In 2016, the “cash in lieu” amount will have to be counted in the “affordability” determination under the Affordable Care Act (ACA), if it was an “unconditional” opt out arrangement and was not adopted before December 16, 2015. But an “unconditional” opt out that was adopted on or before December 16, 2015 will not count in the affordability determination. This will change in 2017.

In 2016, the “cash in lieu” amount will not have to be counted in the “affordability” determination under the Affordable Care Act (ACA), if it was a “conditional” opt out arrangement, but this will change in 2017 unless the conditional opt out arrangement also qualifies as an “eligible opt out arrangement.”

The option should not be provided to enable an employee to purchase an individual policy, whether on or off the exchange.

The option should be offered to all eligible employees, not just to a select few, and should not be offered primarily or exclusively to employees who have high claims.

Employers who are considering an opt-out or “cash in lieu” option should consult with competent benefits counsel to ensure the option is offered in a way that will not result in taxable income to employees or penalties to the employer.

14 Comments

My employer offered me a year waiver for having my own individual insurance. Once I lost my insurance – which I noticed outside of 30 days – I informed my company and asked them if I could be on their insurance. My company told me that since it was outside of the 30 day cancellation time frame, I would not be able to get on their insurance until open enrollment (August 2016-October 2016). Yet, my employer kept giving me the extra money for having the waiver each month. Now that I’ve inquired on enrolling into their health insurance again, my company is saying that I committed fraud and owe them back pay for not providing a written StaYemeni from my insurance company stating that I no longer had insurance. Is this legal?

Employers cannot lawfully pay employees money to decline employer coverage and have INDIVIDUAL health insurance instead. They could offer employees money to opt out and provide evidence (or an attestation of) other GROUP health coverage, or they could simply pay money to employees who decline employer group coverage, whether or not they have other health coverage. And they probably should allow you back in if you lost other group health coverage, although recent IRS rules (July 8, 2016) may allow an employer plan to specifically provide that EEs who opt out must do so for the entire year, and would continue to get the opt-out payment even if they lose the other group coverage.
Some of the particular facts in your case that could affect the answer are: whether your employer paid you to opt out knowing that your other coverage was INDIVIDUAL coverage; if your employer opt out arrangement was “unconditional” (meaning you did not have to show proof of other coverage), whether it was adopted or in place before Dec. 16, 2015. Also, affecting your employer is whether it is a large or small employer, so whether the opt out amount would affect the ER’s “affordability” calculation under the ACA Employer Shard Responsibility provisions.
You might want to talk with an attorney, or with someone at the federal Dept. of Labor (EBSA division), or the State Labor or Employment Dept.

My firm used to re-imbusre us if we had health care under our spouse. If it cost me $200 a month on my husband’s plan, they would pay me the $200. They are saying for the past year that due to the Affordable Care Act they can no longer do that. Is this correct. We are in New York.

Gina and Shelley,
The ACA prohibits employers from reimbursing employees for buying INDIVIDUAL health insurance policies.
Employers who want to encourage employees to enroll under a spouse’s GROUP health plan (where available) usually do so by offering a conditional opt-out payment to all employees. Rather than offer different amounts to each employee — based on the amount the employee will have to pay for coverage under his/her spouse’s group plan– employers usually offer a fixed monthly amount to any employee who declines coverage under the employer’s group health plan and provides evidence of having other group health coverage.
“Applicable large ERs” (ALEs) will have to count certain opt-out payments in the “affordability” calculation for 2016 and beyond UNLESS the arrangement meets specified criteria. THese are listed in my OTHER article on OPt-Out arrangements, entitled Opt-Out Arrangements: What’s OK and What’s Not? It is at https://news.leavitt.com/health-care-reform/opt-arrangements-whats-ok-whats-not/ . The criteria are different in 2016 than for 2017.
I think your employer may have been overly cautious (and stopped offering an opt-out amount) because earlier this year several other benefits advisors and attorneys posted articles stating or suggesting that opt-out arrangements were no longer allowable under the ACA. This is not the case, but there are certain criteria that must be met.

I have coverage through my spouse and I asked my employer if I could be given the flat rate amount they pay all employees who have their insurance plan and I was told that it was illegal to do that. They said because it’s a group coverage they aren’t allowed. I feel that isn’t fair and I doubt it’s illegal and from what I have read if I provide proof of my coverage through my spouse they should be allowed to do it. Where can I find the actual legal information on this topic to print out?
Many thanks!

Tami,
Although employers are ALLOWED to offer cash in lieu of benefits (also called an “opt out” payment), they are not REQUIRED to do so. The July 8, 2016 IRS regulations and IRS Notice 2015-87, both noted above, provide legal guidance on the tax and “affordability” consequences if an employer chooses to offer an opt out payment, but they do not require employers to do so.
You could give your employer a copy of this article, or another one I posted on this website on August 3, 2016, so they will know it is not illegal to have an opt out arrangement. Keep in mind, however, that:
1- The amount of any opt out payment is always less than the amount the employer pays toward health benefits for employees who enroll. It is not required to be less, but it always is.
2- Any opt out amount employees receive is taxable cash. In contrast, any amount your employer contributes toward your health benefits is not included in your taxable income.

I have the same question as Tami Mosel.
Also, I was told that if the employer added it to my salary, that the employer contribution would become a taxable benefit for all employees, even if they enrolled in insurance.

Leavitt Group

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